Due Diligence Phases in an Accounting Practice Sale

Due Diligence in an accounting practice sale always varies from buyer to buyer, but I’ve talked with buyers who like to start the purchase process something like this:  “Hello, my name is Tom.  It’s very nice to meet you, can I please see your top 10 client files and your tax returns from the last three years?”  To which we say…”Slow down…hold your horses.”

We like to divide the due diligence process into two distinct phases.

We find that this works well. It can save time if the parties are not in agreement with price and terms. It also helps the purchaser to evaluate each opportunity from a broader perspective before going into a tremendous amount of detail.
The 2 phases are separated by the purchase agreement. In the initial phase, we want the buyer to have a clear picture or “vision” of the practice. The Buyer should develop some comfort with the seller and allow the seller to get comfortable with Buyer.

To Buyers: We want you to ask questions. Inquiry can often provide the vast majority of the information you need. Some summary reports that give you additional perspective are appropriate in some cases as well. An example would be a receivables aging summary (without client names.) Before an agreement is ever drafted, please assume for the time being that the answers are accurate and complete. You should get all the information that you feel is necessary so that you are able to make an informed offer.

Once an agreement has been successfully completed, you would then begin phase 2. The purchase agreement should include a condition for due diligence. We like to call this the “verification stage” of due diligence. Essentially, this is where the buyer will be verifying that the vision developed in phase one is accurate and complete. This is when the buyer can request more sensitive documents such as bank statements, tax returns, sample files, etc.